Efforts by the U.S. Department of Health and Human Services (HHS) to make the new health insurance exchange program as flexible as possible for the states could hurt health insurers.

Steve Zaharuk, a senior vice president at Moody’s Investors Service, New York, writes about that concern in a commentary about the recent release of HHS notices of proposed rulemaking for efforts to established the health insurance exchange distribution programs required by the Patient Protection and Affordable Care Act of 2010 (PPACA).

The Exchanges

If PPACA takes effect as written and works as supporters hope, the exchanges will help individuals and small groups buy health coverage using a new system of subsidies starting in 2014.

A state can let several exchanges operate within its borders, set up one exchange, join a multi-state exchange consortium, or let the federal government provide exchange services for its residents.

The “qualified health plans” (QHPs) that participate in an exchange must offer a minimum level of benefits and meet other standards set by the exchange managers, or by the state in charge of the exchange.

The District of Columbia, 49 states and 4 territories have accepted preliminary exchange planning grants, and more than half of the jurisdictions have taken additional steps toward setting up exchange programs, HHS officials say.

HHS officials say in the preamble to their proposed exchange rules that they want to give states a great deal of flexibility in exchange design and administration.

A state could choose, for example, whether to open an exchange to any QHP, open exchanges only to winners of competitive bidding processes, or use entry rules somewhere between those two extremes.

A state also is is supposed to create mechanisms to protect exchanges and their plans against adverse selection, but the state can take its own approach to risk management, officials say.

The Critique

The current version of the rules is “credit-negative for U.S. health insurers,” Zaharuk says.

One concern is the provision that would let states or exchange managers limit participation in the exchange, Zaharuk says.

“We view any rule that has the potential to exclude insurers from offering their products in the market as a credit negative for the sector,” Zaharuk says. “We would consider a selection process that potentially affected profits adversely, such as a limit on premiums, as particularly credit negative.”

To control the risk that exchange-sold plans might be far more or far less appealing than plans sold outside of exchanges, states could set requirements for provider networks and marketing practices.

Because that provision “adds additional layers of complexity and cost for insurers to meet different standards in each state, it is credit negative,” Zaharuk says. “The cost issue is especially crucial since insurers are being pressured to reduce administrative costs to meet minimum medical loss ratio requirements.”

The risk management provisions are in place to try to protect health insurers, and “these programs would most likely achieve their objectives,” Zahurk says. “But we view them as credit negative since they would be funded by required contributions from the insurance sector (with contribution rates yet to be determined) and therefore would amount to a reallocation of sector profits.”

The regulations also do little to clarify how the exchanges would really work, Zaharuk says.

National insurers may have to end up working 50 different exchange programs with rules that might not be available until shortly before the exchanges are set to go into operation, Zaharuk says.

- Allison Bell

Other health insurance exchange coverage from National Underwriter Life & Health: